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How a bond revolution went mainstream

The iShares Core U.S. Aggregate Bond ETF (AGG) turns 15 years old this month. As Karen explains, the launch and growth of BlackRock’s flagship U.S. investment grade bond ETF changed the game for investors by putting them firmly in the driver’s seat.

Bond investing has tended to keep a relatively low profile–the alleged province of “bond geeks,” lacking the splashy media coverage of stocks. While the performance of the S&P and the Dow are avidly followed, when was the last time you overheard an elevator conversation about how “the Agg” did that day?

Yet for the past 40 years, some form of “the Agg”–the Bloomberg Barclays U.S. Aggregate Bond Index–has served as the foundational benchmark for the bond portion of most U.S. portfolios. It’s the first stop for financial advisors and other asset allocators, who look at the risk-return profile of the Agg to gauge the percentage and type of bonds they should hold.

A revolutionary idea

Exchange traded funds (ETFs) that track the S&P 500 and other broad stock market indexes have been in existence for a quarter century, but until 2003 there were few options for investors to gain exposure to the performance of the U.S. Aggregate Bond Index. Instead, most people bought individual bonds or looked to actively managed funds for the bond portion of their portfolios. While each approach has its uses, there can be downsides: bond buying can be cumbersome and costly, especially for smaller investors; active funds typically try to outperform the index by over-weighting higher-yielding sectors or adjusting duration (interest rate risk).

The launch of the iShares Core U.S. Aggregate Bond ETF (AGG) revolutionized and democratized bond investing. It was the first ETF to provide all investors with a low-cost, transparent way to “own” the world’s predominant fixed income benchmark. Just like stock ETFs, shares of AGG could be conveniently traded on exchange–tapping into a ready market of buyers and sellers instead of being confined to the over-the-counter system for individual bonds. These innovations have helped AGG grow to over $56 billion in assets.

What’s more, the fund was low cost. Originally, the expense ratio was 0.22%, which was about one-fifth the cost of the average active manager, according to Morningstar. Today, AGG’s net expense ratio is just 5 basis points (0.05%[1]). And the average bid-ask spread of AGG is just 0.01%–a fraction of the cost of buying individual bonds, using data from NYSE ARCA as of 8/31/18.

The parts of its sum

The creation of AGG provided broad bond market exposure. Over the next few years, iShares launched ETFs designed to track the major components of the index. This made it possible to slice the Aggregate index into “sub-sector” ETFs: Treasuries, investment-grade corporates, mortgage- and asset-backed securities, and agency obligations. Like the broader index, these sub-sectors would be difficult for smaller investors to replicate on their own. Investors actively manage these index ETFs by over- or under-weighting sectors based on their goals or market views.

This, too, was revolutionary. The ability to break the index into smaller building blocks gave investors even more control over their bond portfolios, conveniently and cost effectively. It allowed them to adjust the interest rate risk, income potential and diversification properties of their fixed income portfolio based on their specific investment needs. Investors can also diversify outside the U.S. with the iShares Core International Aggregate Bond ETF (IAGG).

Fifteen years ago, there were only a handful of bond ETFs. Today, there are more 1,200 of them, trading in a market worth $840 billion globally (source: BlackRock, as of 8/31/2018). AGG opened the door toward a more modern and transparent bond market.

[1] BlackRock Fund Advisors (“BFA”), the investment adviser to the Fund and an affiliate of BlackRock Investments, LLC, has contractually agreed to waive a portion of its management fees through June 30, 2026. Please see the Fund’s prospectus for additional details.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.comor www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

For more information on the differences between ETFs and mutual funds, click here.

Investment comparisons are for illustrative purposes only. To better understand the similarities and differences between investments, including investment objectives, risks, fees and expenses, it is important to read the products’ prospectuses. When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund investments, like iShares Funds, are not borne by investors in individual stocks or bonds.

Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders.

Diversification and asset allocation may not protect against market risk or loss of principal. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Barclays or Bloomberg Finance L.P., nor do these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of July 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.